Co-signer’s death can haunt borrower of private student loan

WASHINGTON — Some student-loan borrowers who had a parent or grandparent co-sign the note are finding they must immediately pay the loan in full if the relative dies.

The Consumer Financial Protection Bureau says lenders’ contracts have clauses explaining this could happen, but many borrowers are not aware of them.

The agency’s ombudsman, Rohit Chopra, said complaints are growing because the practice is catching so many people by surprise. Some borrowers told to pay back the loan in full have been making timely payments, Chopra said.

While it’s unclear how prevalent it is, Chopra said it appears to be the practice among many private student-loan lenders. It has affected borrowers not just when the co-signer has died, but when the co-signer has declared bankruptcy.

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“We do have some concerns that with an aging population and with very long terms on certain private student loans, that this could actually increase over time,” Chopra said.

The issue doesn’t affect federal student loans, which are more commonly issued than private student loans.

In the private-loan industry, 90 percent of loans were co-signed in 2011; having a co-signer can often lead to a lower interest rate, a report released Tuesday by the bureau said.

Before the 2009 financial meltdown, private loans were more commonly issued, but many borrowers still owe money on them. They generally have higher interest rates.

Richard Hunt, CEO of the Consumer Bankers Association, said in a statement that its members work with their customers “carefully and compassionately” and it is common practice for the lenders to release co-signers from loan obligations.

“We are not aware of lenders accelerating the payment of a loan in good standing upon the death or permanent disability of a co-signer as a typical practice and believe it to be a rare occurrence,” Hunt said.

Chopra, however, said even as many financial companies advertise the ability to release a co-signer from a loan, they make it complicated to do so.

The report said the practice might occur because some lenders rely on third parties that automatically trigger a default “regardless of individual circumstances.”